Insight buys 'once-in-a-lifetime' bond opportunity

LONDON (Reuters) - The bonds of major financial institutions offer an extremely rare opportunity because yields are high yet their issuers will not be allowed to go bankrupt, said Insight Investment fund of funds manager Patrick Armstrong.

Armstrong, who manages 1.2 billion pounds in assets, said in an interview on Tuesday he has been buying bonds of UBS (UBSN.VX), Royal Bank of Scotland (RBS.L), Danske Bank (DANSKE.CO) and AIG (AIG.N), which have AA-ratings, at yields of around 9 percent.

To fund the purchases he has sharply cut back his cash position, which has been running at around 25 percent for most of the past year, and expects to be fully invested within the next week.

"It's a once-in-a-lifetime opportunity," he told Reuters. "The big financial institutions are not going to go bankrupt, or if they do go bankrupt the central banks will bail them out or they will be taken over.

"It's really hard to see a scenario where any central bank lets its biggest financial institutions fail ... Switzerland is not going to let UBS collapse, it can't ... The country's central bank gives you a free put option."

His comments come after the U.S. Federal Reserve orchestrated a takeover of Bear Stearns by JPMorgan in March.

While the deal was done at a firesale price for shareholders, Bear Stearns bonds were assumed by JPMorgan.

Analysts have also argued that should the Fed have to rescue Fannie Mae (FNM.N) and Freddie Mac (FRE.N), for instance, whose shares fell earlier this month on fears they would not have enough capital to survive the housing crisis, senior bondholders could actually benefit.

Meanwhile, companies are expected to raise a record $100 billion from rights issue this year, according to Thomson Reuters data. Such capital raisings tend to benefit bondholders by giving an extra cushion of capital, while shareholders are those who pay.

"They (a major financial institution) would have a rights issue, dividends would be cut to zero ... it would divest assets, the government would take on the remaining liabilities," said Armstrong.

Armstrong, who also holds the BlackRock Capital Securities fund for its fixed income holdings, now has more than 20 percent of his fund in fixed income, compared with zero this time last year, and said this will probably rise to 30 percent.